KUALA LUMPUR, Aug 15 (Reuters) - Malaysia on Thursday renewed the operating licence for a rare earths processing plant owned by miner Lynas Corp for six months with new conditions, an extension shorter than investors and industry analysts had expected.

The Australian-listed firm is the only major proven producer of rare earths outside China, and the decision to renew its licence comes as markets are concerned that the industry may get embroiled in the trade war between Beijing and Washington.

Beijing has in the past tightened supply of the materials, used in goods ranging from military equipment to high-tech consumer electronics.

"They'll have six months to show their progress regarding plans for cracking which for Australia's case is quite advanced," said Matthew Ryland of Greencape Capital, Lynas's second largest investor.

However, the requirement for Lynas to have an alternative processing facility ready within four years suggested that a longer licence renewal would be forthcoming if Lynas met the current conditions, he said. He was optimistic Lynas would meet the four-year deadline.

"Six months is disappointing, doesn't give them very long to go through it all again," said one industry analyst who declined to be named because it was against company policy.

The Atomic Energy Licensing Board, an agency under the environment ministry, said in a statement that Lynas' processing plant in Kuantan, on the east coast of Peninsular Malaysia, will be given a six-month extension of its licence due to expire on Sept. 2. Licence renewals are usually for three years.

The licence renewal confirms a Reuters report last week.

Among the new conditions, Lynas is required to present a plan to set up its cracking and leaching facility overseas within four years of the licence renewal. The cracking and leaching process produces low-level radioactive waste that Lynas and Malaysia had been locked in dispute over for the last eight months.

Lynas will also have to identify a specific location with approval from local authorities for a permanent disposal facility to store its low-level radioactive waste, or it must secure official written approval from a recipient country that will take the waste, the regulator said.

Australia has said it will not accept Lynas' waste.

Lynas said earlier this month that it was conducting preliminary work on a waste-disposal facility, offering to move the waste to disused mines in the state of Pahang where the plant is located.

The Australian company has been running its $800-million Malaysian plant since 2012, processing rare earths mined from Mount Weld in Western Australia.

Lynas announced in May plans to build an initial ore processing plant in Western Australia, part of a A$500 million ($347 million) expansion plan, that would help it overcome the licensing issues in Malaysia.

The regulator also told the miner to end all of its research and development efforts for processing its radioactive waste into agricultural soil conditioner.

Lynas did not immediately respond to an emailed query.

Shares in Lynas fell up to 5.2% before the announcement. (Reporting by Liz Lee in KUALA LUMPUR and Melanie Burton in MELBOURNE; editing by Christian Schmollinger and David Evans)